Assets:Roth IRA at ~$10,000Emergency fund at $2,000Checking/Savings accounts: Now have about $55,000 in them.

Monthly:Income = ~$1800 per monthExpenses = ~$1600 per month

--------------------------Here are a few things I'm definitely going to do:$5,000 - Emergency fund$5,500 - Roth IRA contribution for 2013$2,500 - Student loan interest (for the tax benefits since I believe my total salary will be <$60,000 for the total of 2013).$3,000 - Put aside for a vacation in 2014

That is $16,000, which leaves about $40,000

Here is something I will probably do:Pay off the $13,000 unsubsidized loan at 7.8%

Here is now what I am not sure what to do:Possibly pay off the $22,000 unsubsidized loan at 6.8%Alternatively, put some into a 3-5 year asset allocation investment (30% stocks, 70% bonds?) (in a regular brokerage account) for either a house down payment or a wedding, which will likely occur in about 5 years.

But I am not quite sure what others would suggest, and if there are any alternatives to my plan.

It sounds like a good plan to use for emergency funds, Roth, and pay-down of loans. I might consider a larger emergency fund, Roth, trip, then pay off high-interest loans with the rest. If you keep closer to grad-student living for a few years, it shouldn't be hard to save for those future expenses.

Frankly speaking, if I were paying 6% of interest these days and had the option of paying that off, I'd just do that. The insane rate would just keep nagging at me. There's no investment that can match that either.

If you're able to refinance your loans into something saner, that's a different story.

Thanks, good points. Unfortunately you can't refinance federal student loans these days otherwise I'd try to do that... Consolidation is the only option but that simply averages the interest rates, thereby not letting me pay off the high interest ones first.

1. Set aside $5,500 for the 2013 Roth IRA contribution.2. Set aside $3,000 for the 2014 vacation.3. Add $8,000 to the Emergency Fund to get it up to $10,000.4. Pay off the $13,000 unsubsidized 7.8% student loan.5. Pay off the $22,000 unsubsidized 6.8% student loan.

That leaves $3,500.

Option 1: Pay down the $14,000 subsidized 6.8% student loan to $10,500.Option 2: Pay off the $3,500 unsubsidized 4.7% student loan. Yes, it has the lowest interest rate, but it would completely pay off the loan and free up monthly cash.

I would pay the $2,500 student loan interest out of regular income. You would have had to before the windfall, and by paying off over half your debt the interest may be less.

You don't need taxable retirement accounts until your income is higher and your debt is lower, much lower.

Duckie wrote:Option 1: Pay down the $14,000 subsidized 6.8% student loan to $10,500.Option 2: Pay off the $3,500 unsubsidized 4.7% student loan. Yes, it has the lowest interest rate, but it would completely pay off the loan and free up monthly cash.

Student loans:$13,000 - Unsubsidized at 7.8% <----Pay Off$22,000 - Unsubsidized at 6.8% <----Pay Off$14,000 - Subsidized at 6.8% <----Pay Off $12k or save $12k in EF for the purpose of repayment when you graduate and loans begin to accrue interest (there is no longer a 6-month grace period - loans begin to accrue interest as soon as you graduate)$5,500 - Subsidized at 6.0%$3,500 - Unsubsidized at 4.75%

Saving for your 2013 Roth IRA doesn't make sense when you have high interest debt, your income is about to rise to $100k/yr and you have until April 2014 to make the contribution. Similarly, saving for a vacation in 2014 also doesn't make sense for the same reason. You can use future cash flow for these two things. Knock out the debt.

The unsubsidized loans are all accumulating interest right now, whereas the subsidized are not, and the subsidized total is low enough that you can pay it all off very soon after graduating. So I would pay off all the unsubsidized loans. I don't know if you're eligible for the student loan interest deduction in 2012, but you could split the payoff between 2012 and 2013 (that is, January) so you have $2,500 of interest in each tax year.

Note that the student loan interest deduction as it exists now will not survive into 2013 under current law. The MAGI limit will be lower. (There's also a 60-month time limit.)

To compare the interest rates simplistically, if you will be able to pay off all loans in the summer of 2014, the 4.75% unsubsidized loan will cost you 4.75% interest, whereas the subsidized 6.8% loan will cost you only about 2.3% effective interest over the 18 months. The total dollar difference on a $3,500 loan is very small, however, less than a hundred dollars, so don't agonize over the choice.

Last edited by Bob's not my name on Sun Dec 23, 2012 6:08 am, edited 2 times in total.

Bob's not my name wrote:I don't know if you're eligible for the student loan interest deduction in 2012, but you could split the payoff between 2012 and 2013 (that is, January) so you have $2,500 of interest in each tax year.

I've already paid the $2,500 interest for 2012 at the beginning of this year.

Bob's not my name wrote:Note that the student loan interest deduction as it exists now will not survive into 2013 under current law. The MAGI limit will be lower. (There's also a 60-month time limit.)

Bob's not my name wrote:I just Googled it. Campy seems to be an authority on the subject so I was just asking him if my first Google hit -- or my reading of it -- was wrong. This was my first Google hit: http://studentaid.ed.gov/types/loans/su ... subsidized What was yours?

Bob's not my name wrote:Note that the student loan interest deduction as it exists now will not survive into 2013 under current law. The MAGI limit will be lower. (There's also a 60-month time limit.)

Can you elaborate on both points?

I just Googled this, too.

Beginning in 2013, the 60-month rule returns and the AGI phase-out ranges (before adjustment for inflation) will be reduced to $60,000 – $75,000 for joint filers and $40,000 – $55,000 for other filers (except married couples filing separately who are barred from claiming this deduction).

Edit: I don't consider this to have come from an authoritative source, and another non-government source I read said $55,000 vs. $50,000. I do find the government sources exasperating when it comes to finding out what next year's tax rules will be under current law, but maybe I don't know where to look.

Last edited by Bob's not my name on Sun Dec 23, 2012 4:22 pm, edited 1 time in total.

Bob's not my name wrote:I just Googled it. Campy seems to be an authority on the subject so I was just asking him if my first Google hit -- or my reading of it -- was wrong. This was my first Google hit: http://studentaid.ed.gov/types/loans/su ... subsidized What was yours?

That's interesting. When I Google "subsidized student loan" my top hit is the United States Department of Education. I know Google personalizes searches, but you'd think that would be everybody's top hit.

Bob's not my name wrote:That's interesting. When I Google "subsidized student loan" my top hit is the United States Department of Education. I know Google personalizes searches, but you'd think that would be everybody's top hit.

I searched for "subsidized student loan grace period" actually but the results did change when I turn off personalized searches.

Anyway, it looks like my path forward is clear.

Interesting most people have recommended a total of $10,000 emergency fund. The reason that I didn't put my emergency fund this high is (1) I have a credit card with a high enough limit which can double as emergency funds in a true "emergency" situation, and (2) I can use my Roth as somewhat of an emergency fund.

Or maybe I just don't like the idea of more money sitting in a liquid account earning almost no interest when I hope I never have to touch it

I agree with both your points and I am generally less conservative than the boglehead median when it comes to EF. However, in your situation I don't see much of a dilemma. There is no incentive to pay off subsidized loans that are not accruing interest. Furthermore, even though you are likely to have excellent job prospects as an engineer, you can't be absolutely certain in the economic miracle we're living in, so it makes sense to stay liquid. Finally, you should prepare for the extraordinary liquidity challenges of starting out after graduation (moving costs, possibly a car, apartment first and last months' rent, etc). All of these factors argue for keeping the cash until you are employed and the grace period is over.

Bob's not my name wrote:I just Googled it. Campy seems to be an authority on the subject so I was just asking him if my first Google hit -- or my reading of it -- was wrong. This was my first Google hit: http://studentaid.ed.gov/types/loans/su ... subsidized What was yours?

Currently a Ph.D. Student. Salary = $25,000 per year (stipend). However, sometime in 2013, I expect that salary to jump to approximately $100,000.

I would wait until you actually have started your job to make any big decisions.

In addition to the chance that you might not get such a good starting salary their could also be issues with not having a paid relocation. You could even find a great but lower paying job at somplace like a start up company and having the money in the bank could allow you more flexability in which job you take.

[quote="assumer"]Alright, yeah I can always reevaluate when my future becomes a bit clearer, so I'll keep that $10k emergency fund.[/quote]Yes, this is the best plan, as well as paying off your loans. AFTER you get that large salary, you can then plan on what to do with anything left over and how to create your retirement accounts. Not a good idea to anticipate you will be living well before that happens. Good luck!

Watty wrote:I would wait until you actually have started your job to make any big decisions.

In addition to the chance that you might not get such a good starting salary their could also be issues with not having a paid relocation. You could even find a great but lower paying job at somplace like a start up company and having the money in the bank could allow you more flexability in which job you take.

I didn't see if you have a rainy day/emergency fund yet, but if not, 'parking it in a savings account' would be a perfect use for what is left over after the loans are paid off. Then, when you begin salaried work upon finishing school, you can think of what kind of IRAs to create. In the meantime, you can also write your investment plan statement which should clearly state your goals - short term, intermediate, long term - and describes an asset allocation suitable for your age and those goals, as well as justification for specific investments. Notice the investment choices come last. As others have written, this doesn't have to be a permanent unchanging statement but will be a good thing to have as you begin your new life.